Making the Business Case: Why Diversity Matters to ESG Investors

As investors become aware of the sustainability and ethical implications of their decision-making processes, the conversation around diversity and inclusion (D&I) has become all the more relevant to asset managers. 

Nicsa members had the opportunity to explore the intersection between Environmental, Social, and Corporate Governance (ESG) investing and D&I at a bonus breakfast sponsored by Broadridge during the Nicsa’s 2019 General Membership Meeting in Boston.

“D&I is becoming increasingly important — not only because it’s the right thing to do, but because the business case for diversity is becoming increasingly clear,” said Naadia Burrows, Vice President, Mutual Funds Regulatory Communications at Broadridge Financial Solutions, Inc. “At the same time, we see that ESG investing is on the rise for individuals as well as institutions.”

Burrows moderated the panel, which also featured executives from American Century, Fidelity, and SSGA. She began by asking the panelists to provide examples of ESG funds where D&I is specifically required as an outcome.

Amy Philbrook, Head of D&I at Fidelity Investments, said her firm launched its Women’s Leadership Fund in May.

 “We developed screening criteria on both the social and governance side of the equation — looking at the numbers for gender representation and the underlying policies — and compiled a rating system,” she said. 

The fund consists only of companies that meet the screening criteria on both the social and governance side of gender equality. “When we built the model, we tested it over 13 months and found that it performed at 1% better than the market,” Philbrook said.

Emiliano Rabinovich, Senior Portfolio Manager – Vice President at SSGA, said it’s important to acknowledge that the ESG landscape is messy. 

“Most people would agree that, to some extent, ESG data is spotty, imprecise, and unscientific,” he said. “Right now, you have data providers doing a lot of work, but most of the data they collect is really an estimation — based on their analysis and their comprehension of the matters that are important in ESG.”

These providers often offer little transparency into how they collect data and convert it into ESG scores. When looking to add value in the ESG landscape, SSGA took the approach of onboarding multiple sources of raw data in different areas of ESG and systematically mapping that data to each industry’s unique sustainability profile — as sustainable corporate activities vary.

Sibil Sebastian, Senior Director of Product Management, Global Growth Equity & ESG at American Century, said diversity is one part of the ESG umbrella.

“As ESG gains momentum, the diversity issues will gain momentum as well,” she said. “When I think about the evolution of that concept, we will likely move from ESG considerations to impact investing considerations by way of the United Nations’ Sustainable Development Goals. Hopefully, we’ll come to a place where it’s more about making that impact.”

She added that the regulatory environment has influenced the investment industry’s focus on diversity, citing the UK’s recent mandate that employers with 250 or more employees must publish and report data about their gender pay gap, as well as California’s law requiring women on corporate boards.

“Companies have to pay attention, and they do have to make a shift because they are being scrutinized from different angles, whether it’s asset owners or legislation making the demands,” she said.

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